Sunday, September 11, 2011

Dumb Money origins

Greetings all, I would like to explain to you all why I named my blog Dumb Money. Simply, "dumb money" is what wall street calls us small time retail investors. It is a derisive term that comes from our behaviors when it comes to investing. Have you ever heard the phrase to make money in stocks you have to "buy low and sell high"? Well dumb money buys high and sells low. Dumb money gets happy and excited when the market goes up and then gets scared when the market drops and sells everything locking in a loss.

If you invest in the stock market without a plan, you are dumb money! Most people who invest in stocks are dumb money because they just pick stocks and hope they go up. Smart money is big time hedge fund managers, professionals who are the ones who move markets with their billions of dollars. They plan and do a lot of research on company's they want to buy and they know how to read balance sheets and of course they know what to do if their bets go against them.

Dumb money is a psychological thing as well. People who make decisions based on fear and greed are dumb money. That is how I used to invest and why I lost a lot of money in the past. I would get happy when the market was going up and would buy lots of stocks but did not know what to do when the market went down. In 2008 the markets were crashing and so were my stocks. I told myself I could handle it and ride it out but I ended up selling a bunch of my stocks for huge losses near the bottom. I am trying to fight those tendencies now and my blog title is there to remind me to not make rash decisions and plan carefully the moves I make in the market.

I don't want people to think that if they do not understand some of the things I talk about in this blog, they are dumb money. That is not my intention. It took me 4 years of reading about economics, stocks and investing to even feel comfortable to sort of know what I am talking about and I still feel like I am dumb money. Dumb money has nothing to do with how much or how little you know about finance or the economy.

"On Wall Street, there's smart money and dumb money. You (and I) are dumb money. Smart money (big-time hedge-fund managers, private-equity honchos, leveraged buyout kings) reliably outperforms the market. Dumb money (individual investors, the sort of people who casually watch CNBC for stock tips) generally fares poorly. Individual investors—that is, we—are considered such dumb money that many professional investors regard us as contrary indicators. The lemminglike masses get excited and overly optimistic when the market's about to top, and they tend to get fearful and overly pessimistic when the market's about to bottom. So, if you could just figure out what the dumb money is doing and zig when it zags, that may be a path to easy profits."

In other words, if you want to make money in the stock market, all you have to do is read this blog and do the opposite of what I do. YOU CAN'T LOSE!!!

:)

PS On this 10th anniversary of 9-11, my thoughts and prayers go out to the victims of the tragedy and their families. Here is a tribute video I found on the web which I thought was poignant. Never forget...